ITAT Bangalore held In the case of M/s Tejas Networks Ltd. vs. DDIT that the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute “royalty” for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the nonresident companies would amount to “royalty” within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195.

Facts of the Case

The assessee is an Indian Company who is engaged in developing telecommunication equipment. During the relevant asst. year, the assessee has purchased shrink-wrap Software from Cadence Designs Ireland amounting to Rs.5,946,245/- and Rs.4,015,887/- respectively. The AO noticed that the assessee has remitted the above amounts to Cadence Designs Systems Ireland without deducting tax at source u/s 195. The AO initiated proceedings u/s 201(1).

The assessee submitted that the payment made to the non-resident Indian was made for the use of software under non exclusive and non transferable and licensed to use the software. Accordingly, the payments in question are not chargeable to tax in India and, therefore, no liability to deduct tax at source in respect of such payment. The AO however did not convinced with the explanation furnished by the assessee and was of the view that as per the provision of sec. 195, the assessee was liable to deduct tax at source on the payment made to Cadence Designs Systems Ireland. During the purchase of shrink-wrap software as a payment made amounts to royalty under the Income-tax Act as well as the Indo-Ireland DTAA. The AO accordingly held that the assessee is default u/s 201 and 201(1A) and accordingly calculated the tax liability.

Contention of the Assessee

The ld counsel of the assessee submitted that the appeals are already decided against the assessee in assessee’s own case in ITA No.31/Bang/2015 dated 5/6/2015.

Contention of the Revenue

The ld counsel of the revenue supported the order of the CIT (A).

Held by CIT (A)

The CIT(A) dismissed the assessee’s appeal by following the decision of the Hon’ble High Court of Karnataka in the case of CIT Vs. Samsung Electronics Co. Ltd., 245 ITR 181. It was held that it is very clear from the express terms of the agreement that the right to use copy righted software has been transferred to the assessee. Keeping in view the fact that the judgment of the Hon’ble High Court of Karnataka takes the nature of binding precedent the amounts in question paid as consideration for the right to use copy-righted software amounts to Royalty within the meaning of the Act read with respective DTAA, the contentions of the assessee’s representative are rejected.

Held by ITAT

Whether the payments made for acquiring the shrink-wrap Software amounts to royalty u/s 9(1)(vi) of the Income tax Act and also Indo- Ireland DTAA?

As pointed out by both the counsels, the issue is already decided against the assessee in assessee’s own case by this tribunal in ITA No.31/Bang/2015 dated 5/6/2015 considering the ratio of Hon’ble Karnataka High Court in the case of Samsung Electronics Co. Ltd. 245 ITR 181. It was held in this case that It is clear from the analysis of the DTAA, the Income-tax Act, the Copyright Act that the payment would constitute “royalty” within the meaning of article 12(3) of the DTAA and even as per the provisions of section 9(1)(vi) of the Act as the definition of “royalty” under clause 9(1)(vi) of the Act is broader than the definition of “royalty” under the DTAA as the right that is transferred in the present case is the transfer of copyright including the right to make copy of software for internal business, and payment made in that regard would constitute “royalty” for imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill as per clause (iv) of Explanation 2 to section 9(1)(vi) of the Act. In any view of the matter, in view of the provisions of section 90 of the Act, agreements with foreign countries DTAA would override the provisions of the Act. Once it is held that payment made by the respondents to the nonresident companies would amount to “royalty” within the meaning of article 12 of the DTAA with the respective country, it is clear that the payment made by the respondents to the non-resident supplier would amount to royalty. In view of the said finding, it is clear that there is obligation on the part of the respondents to deduct tax at source under section 195.

Respectfully following the above decision of the Hon’ble Karnataka High Court and also decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case in ITA No.31/Bang/2015 dated 5/6/2015, we are of the opinion that the contentions raised by the assessee are not acceptable for the reason that the payment in question was consideration for the right to use copy right shrink-wrap software amounts to royalty within the meaning of sec. 9(1)(vi) of the Act and also Art 12 of the Indo- Ireland DTAA, therefore, grounds raised by the assessee are dismissed.